In the first half of the film, set in the 14th century, a kindly old woodcutter, Claus, and his wife Anya give shelter to a lost group of elves who have been forced out of their village by an evil sorcerer. In gratitude, the elves grant Claus and Anya immortality and the ability to fly with the aid of a magical reindeer. They become Santa Claus and Mrs. Claus and begin their life's work of making toys and delivering them to children all over the world.
In the second half, set in present-day New York City, Santa Claus and the elves continue their work at the North Pole, but they are struggling to keep up with the demand for toys. Patch, the head elf, who is feeling underappreciated and unfulfilled, leaves the North Pole and journeys to the city, where he falls in with an unscrupulous toy manufacturer, B.Z., who promises to make him rich and famous with a new line of high-tech toys.
Patch is initially successful, but he soon discovers that B.Z. is planning to reveal Santa Claus as a fraud and take over the Christmas toy market for himself. Meanwhile, Santa Claus has fallen ill, and it is discovered that the source of his immortality, a special candy made by the elves, has been tampered with and is causing him to age rapidly.
Patch realizes his mistake and returns to the North Pole to help save Santa Claus and restore the true spirit of Christmas. Together, they defeat B.Z. and his evil henchman and restore the magic of the holiday season. The film ends with Santa Claus and Mrs. Claus rekindling their personal relationship, and Patch learning the value of loyalty and friendship.